Afternoon analysis 31.07.2015

The dollar dropped after the labor market data suggested that the rate hike in September may be deferred. The European labor market was deteriorated. The zloty gained against the dollar.

On Wednesday the Federal Reserve showed a somewhat hawkish stance. As a result, the US central bank has left the way for interest rate hikes later this year wide open. However, the latest reports introduced a lot of uncertainty concerning the performance of the US economy.

The employment cost index increased 0.2 percent in the second quarter. It was the weakest increase since records began in 1982. The forecast was for a 0.6 percent increase. Moreover, yesterday's data on the GDP growth missed the forecast. The economy expanded in a 2.3 percent pace, less than the 2.6 percent that was projected.

The latest US reports revealed that the likelihood of the inflation rate meeting the Fed's goal is still very slim. Subdued wages give no chance for stronger consumption which would be sufficient to support the price growth.

On Wednesday the Fed said it needs to be certain that the inflation rate will return to the goal before deciding to increase the interest rates level. Given the latest reports, it is not clear at all. Thus, today's report increased the likelihood that the level of rates will remain unchanged. As a result, the dollar dropped.

Moreover, the consumer sentiment index from the University of Michigan missed the forecast - a signal that consumption will remain under pressure. The Chicago PMI index exceeded the forecast, but it was not influential.

The European labor market is getting weaker

The data from the European labor market missed the forecast. The unemployment rate stood at 11.1 percent - unchanged from the previous month. The forecast was for 11 percent. The unemployment rate in Italy increased to 12.7 percent - more than the 12.3 percent that was expected. Moreover, in Germany the number of newly unemployed increased at the highest pace since May 2014.

The flash inflation report was in line with the forecast. It stood at 0.2 percent. However, the core inflation index increased more than anticipated. The measure that excludes the volatile prices of food and energy increased 1 percent against the 0.8 percent that was expected. The report supported the euro.

Prime Minister Alexis Tsipras has managed to defer the threat of a snap election. The Syriza party decided to make a summit in September. The party member will decide whether the government was right to accept the bailout program.

As a result, the internal opposition in Syriza will have the opportunity to remove Tsipras in the fall. However, until the vote is organized, the introduction of the bailout program will be closed. Thus, the risk of a government collapse has been limited.

Greece is expected to repay the European Central Bank on 20 August. The nation will not fulfill this obligation, if the money from the bailout program is not disbursed. A negative scenario will lead to the collapse of the Greek banking system. However, given the recent development, the probability of a similar scenario is limited.

The zloty rebounded against the dollar

The rouble remained under pressure after the Russian Central Bank cut rates earlier on in the day. The USD/RUB increased to the highest level since mid March. The Russian currency increased after the weak US reports were released, but it remained on a low level.
The zloty increased against the dollar and the pound. The Polish currency especially exploited the weakness of the dollar. But the zloty dropped against the euro, and the frank was steady. If the US reports continue to disappoint, the zloty may extend gains in the near future.

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without the written permission from Cinkciarz.pl Sp. z o.o is prohibited.

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